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TMI Blog2017 (12) TMI 1662X X X X Extracts X X X X X X X X Extracts X X X X ..... osely held company is in breach of fiduciary obligation of the Directors which is neither in compliance with the legal requirements nor ensures the fair play and probity in corporate management. Thus, it amounts to an act of gross oppression. In view of this, the allotments made on 25.04.2008 and 11.08.2010 of 505000 shares to Respondent Nos. 2 and 3 is illegal. Board Meetings held without quorum as required by the Articles of Association of the 1st Respondent Company are bad in law and the appointments of additional Directors at such Board Meeting was also bad in law, as that failed to satisfy the test required by law as has been laid down in Murari Mohan's case [2015 (7) TMI 298 - COMPANY LAW BOARD] The allotments of shares i.e. 5,05,000 in favour of the Respondent Nos. 2 and 3 made on 25.04.2008 and 11.08.2010 are declared illegal, and the same stand set aside. The Board Meetings purportedly held on 25.04.2008 and 11.08.2010 are not tenable in the eye of law, the same are declared as illegal, and all decisions taken there at are set aside. The EoGMs dated 22.01.2011 and rights offer dated 01.02.2011 are declared illegal, null and void and hence, are set aside. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent Company viz. M/s. Seaqueen Builders Private Limited, was incorporated on 2.01.1995 with CIN No. U45201KL2005PTC008520. The registered office of the 1st Respondent Company is situated at 32/2982 B, Sahrudaya Building, Ponnurunni, Vyttila P.O., Ernakulam- 682 019. The main objects of the 1st Respondent Company is to do real estate or property developers whether by development of land or in any other manner including filling of land, laying of roads and construction of buildings. 2. The Petitioner No. 1 is holding 59000 of shares in the 1st Respondent Company. The Petitioner No.2 is an ex-Director of the 1st Respondent Company and holds 1,000 shares. They together hold 60,000 shares out of the 95,000 issued shares of the 1st Respondent Company as on 31.03.2008, representing 63% of the issued capital of the 1st Respondent Company. Therefore, they fulfil the requirements under Section 399 of the Companies Act, 1956, for filing this Petition. 3. Under challenge is the allotments made on 25.04.2008 and 11.08.2010. Besides this, the Petitioners have challenged the continuation of Respondent No.3 as Director and appointment of Respondent No.4 as Director of the 1st Responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares. It is alleged that the shares allotment purported to have been made on 25.04.2008 and 11.08.2010 are the result of an afterthought of the Respondents for a collusive purpose and were clearly ante-dated, because, no notice of Board Meetings has been given to the 2nd Petitioner, who was a Director on the dates of the share allotments. It is interesting to note that the second purported allotment of shares and the alleged cessation of office of directorship of the 2nd Petitioner were both taken on the same day i.e. 11.08.2010 to show as if the 2nd Petitioner was not a member of the Board at the time of the shares allotment. It has further been averred by the Petitioners that the share allotments were also vitiated by the infirmity of the Board that was incapacitated and incompetent to act on the alleged dates of shares allotment 25.04.2008 and 11.08.2010, because the 3rd Respondent Viz., Mrs. Bindu Paul not being among the first director appointed under the Articles of Association, was a retiring director and was due to retire by rotation at the Annual General Meeting of 2006 and 2008, pursuant to Article 28 of the Articles of Association, which is reproduced below:- 28. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was appointed as director of the Company on 22.01.2011 by the Board of Directors. The said appointment is in violation of article 28 (i) which stipulates that except the first Directors, Directors shall be generally appointed only at Annual General Meeting. Therefore, the appointment of Respondent No.4 is contrary to the Articles of Association. The said appointment has not been made as an additional director under article 23 which is evidenced by the fact that in the return of appointment (Form No.32) filed by the 1st Respondent Company (annexure P4), the designation of the appointee is mentioned as director and not as additional director , that too, has been made by the incompetent Board because the Respondent No. 3 viz., Mrs. Bindu Paul's, appointment was not valid in the eyes of law. Besides these, there are other allegations which the Petitioners say are oppressive, burdensome and harsh against them and are also against the interests of the 1st Respondent Company. The other allegations suggest that the Respondent Nos. 2 and 3 are involved in siphoning off the money from the accounts of the 1st Respondent Company, and the purported share application money was first syph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Petitioners in the Petition, the Respondents contended that the Petitioners cannot suddenly lay claim to a share in the growth and prospects of the Company beyond their stake after having been in deep slumber all these years. The answering Respondents justified the continuation of Respondent No.3 as Director on the Board of the first Respondent Company stating that an inadvertent omission to put through a formality of retirement and re-appointment as specified in the Articles cannot be fatal to the Directorship of Respondent No. 3. As there is no bar under the Companies Act to have the Directors appointed by the Board and such a Directors need not necessarily be additional Directors. Therefore, there is no legal infirmity or invalidity in the composition of Board of the first Respondent Company. 14. It has been pleaded by the Respondents that there is no mala fide in the allotments under challenge as the same were made for proper purpose in good faith and the performance of the Company will show the result of such capital augmentation. The delay in filing returns could not establish that the allotments suffer from any infirmity so as to affect their legality or validity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricated one which is conclusively proved from the fact that the postal seal is seen as dated 2nd September, 2009 which is the closed holiday being Thiru Onam . 19. The Petitioners have also referred to the statement made by the respondents in the counter wherein it has been mentioned that the Petitioner No.2 has not made any such payment of ₹ 7 lakhs, but the payment is evidenced by certified copy of bank accounts with Indian Bank of Petitioner No.2 and also the 1st Respondent company's bank accounts with State Bank of Travancore, Edapally. It has also been mentioned that the statement which has been made by the respondents that the authorized capital was increased from ₹ 15 lakhs to ₹ 60 lakhs on 29.04.2004 is false because the authorized capital was raised from ₹ 12 lakhs to ₹ 60 lakhs. The petitioners have also stated in the rejoinder that the statement made by the respondents that the amounts were brought in by Respondents No.2 and 3 is also false. The petitioners in their rejoinder have also rebutted the allegations levelled by the respondents with regard to non availability of DIN of Petitioner No.2 and stated that the number was provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not get any rights shares on those shares. The clandestine share allotment dated 25.04.2008 and 11.08.2010 were made to tilt the shareholding pattern grossly in favour of 2nd and 3rd respondents thereby to reduce the petitioners to a minority who were till then holding the majority stake even according to the respondents. 22. It has been averred by the Petitioners in the rejoinder that Annexure R25 filed by the respondents is a Board resolution dated 25.04.2008 for the allotment of 55,000 shares in favour of 2nd and 3rd respondents. In this resolution, along with 2nd and 3rd respondents, one Mr. K.A. Mithai who is Respondent No. 4 is added as an authorized signatory for signing share certificates, but he (K.A. Mithai) had never been associated with the Company previously including on 25.04.2008 when the share allotment was made. He claims to have been appointed as Director only on 22.01.2011 as per Form No.32 filed as Annexure P4 to the main petition. This shows that the respondents have fabricated, concocted and falsified the records. 23. The Petitioners in their rejoinder rebutted the contentions of the respondents about their being financially weak, the petitioners stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows : (i) Whether the allotment of shares i.e. 5,05,000 in favour of Respondent Nos.2 and 3 in the Board Meetings purportedly held on 25.04.2008 and 11.08.2010 is legal and valid? (ii) Whether the continuance of Respondent 3, viz., Mrs. Bindu Paul as a Director of 1st Respondent company is legal and valid? (iii) Whether the appointment of 4th Respondent as a Director of the 1st Respondent company purportedly made on 27.1.2011 is legal and valid? (iv) Consequential Reliefs? 26. In relation to the issue No.(i), the Petitioners would contend that on 25.04.2008 and 11.08.2010 a total of 445000 shares and 60000 shares were illegally allotted in the names of 2nd and 3rd Respondents respectively, who are spouses (aggregating in total 505000). No notice of Board Meetings had been given to the 2nd Petitioner viz., Mr. K. P Augustine, who was a Director on the dates of the share allotments. The relative returns of the allotments were filed belatedly on 25.06.2010 and 02.11.2010 respectively, which appears to be dubious, suspicious and afterthought. In reply, the Respondents would contend that the notice of Board Meetings dated 25.04.2010 was dispatched. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondents are claimed to have been sent through same Post Office, which also raises serious doubts. 27. There is nothing on record to suggest that at any point of time, the Respondents, being Directors of 1st Respondent Company, have made disclosure to the shareholders regarding the share allotments made on 25.04.2008 and 11.08.2015, which they are obliged to do as part of their duty to act in good faith and make full disclosure to the shareholders regarding the affairs of the Company. In Dale and Carrington Investment (P) Ltd v. P. K. Prathanpan, [2004] 54 SCL 601 (SC) it has been laid down that fiduciary capacity within which the Directors have to act enjoins upon them a duty to act on behalf of a Company with utmost good faith, care, skill and due diligence and in the interest of the Company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all the matters relating to the Company. 28. The Respondents have never made disclosure of share allotments to the Petitioners. Not only this, it is an admitted fact that the returns pertaining to the share allotments in question have been filed belatedly. The non-filing of the returns or st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s neither in compliance with the legal requirements nor ensures the fair play and probity in corporate management. Thus, it amounts to an act of gross oppression. In view of this, the allotments made on 25.04.2008 and 11.08.2010 of 505000 shares to Respondent Nos. 2 and 3 is illegal. Therefore, the issue No.(i) is decided in favour of the Petitioners and against the Respondents. 31. In relation to the issue No.(ii), the Petitioners would contend that the 3rd Respondent viz., Mrs. Bindu Paul, not being among the First Directors appointed under the article was a retiring director and due to retire by rotation at the Annual General Meeting of 2006 and 2008 pursuant to article 28 of the Articles of Association of the 1st Respondent Company. For the sake of the convenience, the article 28 of the Articles of Association is reproduced as follows:- 28. i. Except the first Directors, the Directors shall be generally appointed by the Company only in Annual General Meeting. ii. Subject to the powers of the members to appoint or remove any director by passing any ordinary resolution in any general meeting the first Directors appointed by virtue of these articles are not liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndividual shareholders also. Thus, the articles are a source of power of the directors, who can as a result exercise only those powers conferred by the Articles. Any action that requires to be done as per the Articles of Association, if done contrary thereto would be ultra vires. This has been laid down by Hon'ble Apex Court in Smt. Claude Lila Farulekar v. M.S. Sakal Papers (P.) Ltd. [2005] 59 SCL 414 (SC). Therefore, the continuance of 3rd Respondent viz., Mrs. Bindu Paul as Director of the 1st Respondent Company being contrary to the Articles of Association of the 1st Respondent Company, is illegal and invalid. This renders the Board below the requisite quorum as referred in the Articles of the 1st Respondent Company, and the 2nd Petitioner was not present as no valid notice for Board Meeting was issued to him, and there was only one Director i.e. Mr. K. J. Paul, i.e. the 2nd Director for the Board Meeting purportedly held on 25.04.2008 and 11.08.2010 which is below prescribed minimum i.e. two directors as provided under article 18 of the Articles of Association of the 1st Respondent Company. This also renders the share allotments made on 25.04.2008 and 11.08.2010 as illegal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, set aside. The 1st Petitioner is appointed as Managing Director of 1st Respondent Company and Mr. K. J. Paul is removed from the position of Managing Director, but he shall perform the duties as Director of the 1st Respondent Company. Consequently, the said Board of Directors is directed to rectify the Register of Members by restoring the shareholding pattern as on 30.09.2005 as shown under para 6(a) of the Petition. Keeping in view the totality of circumstances and the intention of the parties, it is proposed to appoint an independent Auditor within three weeks of passing this Order, with the consensus of the Board of Directors comprising of 1st Petitioner and the 2nd Respondent, failing which, this Bench on mention by any of the Directors, shall appoint the independent Auditor out of the names, if suggested, by the parties, who (Independent Auditor) shall determine the true and fair value of the shares of 1st Respondent Company by taking into consideration three Financial Years w.e.f. 2011 onwards. Based on the said value, and keeping in view the shareholding pattern as on 30.09.2005, the first opportunity for purchase of shares of Respondents is given to Petitioner, fai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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